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Beware railway shares?

A total of 88 high-speed trains travel between Beijing and Shanghai a day

Passengers do better out of high-speed rail than investors, it seems. The backers of bullet trains argue they pay their way by benefiting the wider economy but few high-speed lines are said to make money on a consistent basis – though Paris-Lyon in France and Tokyo-Osaka in Japan are thought to.

Candidates for high-speed profit are thin on the ground in China’s bullet train network as well, which now carries more than twice as many passengers as its domestic airlines. But one of the outliers is the railway between Beijing and Shanghai, which has transported more than 825 million passengers, and is now said to be doing well enough to plan for an initial public offering.

Although there were concerns about costs when the Beijing-to-Shanghai line was nearing completion (see WiC113), a study by the World Bank a few years later pointed to China’s edge in construction. The building of each kilometre of track was thought to cost about half the amount for similar lines in Europe and about a third of the projected expense in the United States.

Chinese advantages in infrastructure projects are well known, especially the lower labour costs and the state’s capacity to commandeer land at competitive prices. But railway bosses have also benefited from the scale of the country’s high-speed ambitions, driving down unit costs for construction: there is now about 25,000km of bullet train track across the nation, more than the rest of the world combined.

The best indicator for whether a high-speed link is going to operate profitably is passenger turnover per kilometre, National Business Daily reports. Correspondingly, eastern parts of the country hold the most promise because of their population densities and higher incomes. More people in these regions can afford the higher fares (bullet train tickets cost about three times those for conventional trains, the World Bank says), while high-speed connections in central and western China face a tougher time getting to breakeven.

The most profitable railways are between nearby city pairs and at least four high-speed links between easterly cities were already said to have made it into the black two years ago (Shanghai-Nanjing, Nanjing-Hangzhou, Shanghai-Hangzhou and Beijing-Tianjin), plus express services between Guangzhou and Shenzhen, the two richest cities in the south.

The best-performing bullet trains have been operating between Beijing and Shanghai, however, connecting China’s two most influential cities and bringing together the economic powerhouses of the Yangtze River Delta and the Bohai Economic Rim.

The railway started carrying passengers in mid-2011 and ran at a loss for its first three years. It then moved into profit in 2015 and generated net income of about Rmb31 billion ($4.55 billion) over three years, according to snippets of information from its shareholders.

The service between Beijing and Shanghai is longer-distance than the other better-performing routes but it benefits from picking up higher-paying businesspeople at various stops along the way. In this regard its trains are really serving a series of overlapping city pairs, tapping into demand from conurbations like Tianjin, Jinan and Nanjing, which makes the line the busiest in the country. The line also pioneered locally developed Fuxing bullet trains (see WiC373) last year, which are being lengthened to boost passenger capacity further. Indeed, the world’s longest high-speed train (400 metres, with 16 carriages carrying about 1,200 passengers) started running on the line this month, the China Daily reports. (For perspective, an all economy class A380 jet could hold a maximum of 850 passengers; a typical configuration with three classes is 550.)

An IPO for the railway would be revealing in providing more details on passenger flows and more scrutiny on whether subsidies from local governments are playing any part in the railway’s profitability along the route.

Also important: fuller disclosure on the loans outstanding on the construction of the line, plus the cost of servicing them.

Domestic media say that state-controlled China Railway Corporation (CRC), the largest investor in the Beijing-to-Shanghai line with a 46% stake, has been reluctant to consider an IPO in the past but it seems to have been persuaded by the next two largest shareholders in the railway, Ping An Asset Management and the National Social Security Fund.

Probably more importantly, CRC is one of the candidates for the kind of ‘mixed ownership’ reforms that are supposed to push the state firms in a more market-friendly direction. Last summer the railway giant came in for criticism from government graft inspectors and it has already restructured its regional transport bureaus in a bid to bring them more into line as commercial companies.

CRC is also trying to reduce its debts after inheriting huge liabilities from the now-dissolved Ministry of Railways as part of the industry-wide overhaul five years ago (see WiC184). Billions more yuan have been spent on network expansion since then and total debt moved past Rmb5 trillion at the end of March, or about two-thirds of the company’s assets.

Fare hikes for the more popular lines will do some of the work in shoring up the balance sheet but railway officials have been exploring other ways to pay down debt, such as the sale of thousands of hectares of land near the busiest stations. (A business model pioneered in Japan and used very effectively by Hong Kong’s railway monopoly MTR too.)

CRC bosses have also signed deals with the stock exchanges in Shanghai and Shenzhen to prepare for bond issuances and asset securitisations. But with the strongest and most reliable cash flows of its peer group, the Beijing-to-Shanghai line could be a pioneer for the kind of solidly performing infrastructure stock that policymakers would love to launch on local bourses.

However, at this point there is no clarity on how big such an IPO would be or what sort of valuation will be ascribed to it. And it is hard to think of a listed entity that could be used by investors for comparison – i.e. one that contains only a bullet train service.

The Eurostar that connects London and major European cities – primarily Paris – offers a benchmark of sorts. In 2015 the UK government sold its 40% stake in the service to the Canadian institutional investor Caisse de dépôt et placement du Québec (CDPQ) and UK-based Hermes Infrastructure. The pair paid £585 million for the stake, which suggests the Eurostar as a whole is worth about $1.92 billion.

But the comparables with the European train break down when it comes to scale. According to Eurostar’s website it has carried a cumulative 150 million passengers since its inception in 1994. Based on a Xinhua statistic the Beijing-Shanghai line has transported roughly 138 million travellers each year since its operations began in June 2011.

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